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Lump sum payment: capital or revenue in nature?

The case of J A Thornton v HMRC [2016] UKFTT 767 (TC) considered the issue of whether a lump sum payment at the termination of a lease was capital or revenue in nature.

The taxpayer owned a block of flats which was leased to a tenant. The lease for the flats made the tenant responsible for the upkeep of the flats but they did not do so. Later, the flats were left vacant for at least a year as they were not fit for habitation but the tenant continued to pay rent. Subsequently, the tenant and the taxpayer came to a settlement where the lease (which still had 5 years to run) would terminate and the taxpayer could recover the flats to prevent further disrepair. The taxpayer was paid £250,000 under the settlement which he used to repair the building.

The HMRC sought to tax the settlement sum as an income receipt because it covered the loss of rental income due to the dilapidated state of the properties. The taxpayer argued that the sum was a capital receipt since it allowed him to safeguard his capital investment and had been used to repair the property.

The First Tier Tribunal held that the property had suffered a significant diminution in value due to the lack of upkeep on the part of the tenant and that all of the settlement, and more, had been expended on the repairs. The nature of the liability was thus to make good the fall in capital value attributable to the dilapidations that the tenant had failed to make good. The settlement was to make good the permanent diminution in the capital value of the taxpayer’s investment and was hence a capital receipt.

Editorial Note

Cases like this occur quite frequently in the Singapore context. Hence, this case is useful in demonstrating the application of settled principles. The purpose of a receipt is crucial in the determination of its taxability in the current case. Given that the lease in the current case still had 5 years to run, the lump sum payment could have been regarded as the outstanding rent to be paid over the remainder of the lease and hence taxable as a revenue receipt. However, as there was evidence that the payment was meant for and indeed used for repairs, the taxpayer in the current case succeeded in showing that the receipt was a capital one. Generally speaking, where the settlement sum is based (as is usually the case) on the rental income which would otherwise be accrued, the receipt will be regarded as revenue.

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